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Strategic Trade Policy - market regardless of what Boeing...

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Strategic Trade Policy Strategic trade policy refers to the aggressive support by a nation's government of the international competitive position of home firms. Imagine that a new technology will soon be available to produce a new kind of passenger aircraft and that there are two firms (Boeing and Airbus) in a position to develop that technology. The economics are such that only one firm can enter the market profitably: profits are 100 if only one firm enters; if both enter, they each lose 10. What will happen? Suppose Boeing enters first, Airbus will stay out and Boeing reaps the profits. Suppose that a group of European governments promise Airbus a subsidy of 20 if it enters the
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Unformatted text preview: market, regardless of what Boeing does. Whatever Boeing does, Airbus finds it profitable to enter. But, this means that if Boeing enters it will lose money. So, Boeing doesn't enter and Airbus does. problems with strategic trade policy • government must estimate the potential payoff of each course of action • the behavior of rival governments must be anticipated • many interest groups will compete for the governmental assistance although only a small number of industries can be considered potentially strategic • subsidizing one domestic industry takes resources away from others...
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